End is not quite nigh for America

Vehicles drive Jianguo Road in Beijing's central business district. Government statistics used to gauge the health of the Chinese economy are notoriously unreliable. They are compiled by local government officials who have an incentive to inflate the results. China watchers say, however, that the trend of the data can be trusted, if not the detailed numbers themselves.

That was the eye-catching headline on a column flogged Monday morning by MarketWatch, the estimable online news service in Rupert Murdoch's Dow Jones stable. The piece itself, by senior columnist Brett Arends, caused a bit of stir, and for good reason. It said the IMF has concluded that China's economy will overtake that of the U.S. in real terms by 2016, about a decade earlier than any previous forecast.

"Most people aren't prepared for this," he writes. "They aren't even aware it's that close. Listen to experts of various stripes, and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s."

That's true not only of the permabears, but of the IMF itself.

How could the IMF have two dramatically different forecasts of China's economic ascension? Easy. The one latched on to by MarketWatch relies solely on gross domestic product as measured by purchasing power parity (the amount of goods and services that can be purchased domestically, relative to other countries, after accounting for exchange rate differences). The one preferred by the IMF and most other analysts looks at GDP through the lens of prevailing exchange rates.

"The figures used in the story … do not constitute a new IMF projection," said a spokesperson for the agency. "The IMF considers that GDP in purchase-power-parity (PPP) terms is not the most appropriate measure for comparing the relative size of countries to the global economy, because PPP price levels are influenced by non-traded services, which are more relevant domestically than globally. The fund believes that GDP at market rates is a more relevant comparison. Under this metric, the U.S. is currently 130 per cent bigger than China, and will still be 70 per cent larger by 2016.

Mr. Arends counters that this is "a largely meaningless comparison in real terms." China's currency, he argues, is actually worth far more than its current artificially suppressed level.

By the way, on a purchasing-power-parity basis, the Chinese economy will reach $19-trillion (U.S.) in 2016, up from $11.2-trillion this year. The IMF forecasts that the U.S. economy will grow by $3.6-trillion in the same five-year period to $18.8-trillion.

No one doubts China will one day overtake the U.S., based on the current growth trajectories of the two countries, no matter how that growth is measured. But before the U.S. cedes that crown, China still must work its way through myriad structural and social problems that could easily slow, if not derail, the economic engine.

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And when it comes to gauging the true health of China's economy, other temperature readings, including per capita output and income, are more useful than any measures of GDP. Those data reveal that China still has a large mountain to climb before it can discard its label as an emerging economy.

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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